What is FATCA? 

August, 2012 - By Daniel Tribaldos, Managing Director of MMG Panazur Ltd. SA, Zurich

The Foreign Account Tax Compliance Act (FATCA) is the newest piece of legislation from the US which should ensure and enforce the correct declaration and payment of taxes owed by US tax payers. The bill was passed in March 2010 whereupon the proposed regulations were presented on February 8th, 2012. The act should come into effect through several steps from January 1st, 2013 to January 1st, 2017 when full reporting requirements will be in force.

Withholding Tax

Financial Institutes worldwide will be forced to collect financial data about US tax payers and report it to the Internal Revenue Service (IRS). If a Financial Institute refuses to comply with these regulations, a withholding tax of 30 % will be applied on interest payments, dividends and capital gains from US source to such institute, regardless of whether or not such payment was made for the benefit of a US tax payer, for another client or for the institute itself.

FATCA offers two options to avoid this withholding tax: The first option for a Financial Institute is to negotiate an agreement with the IRS. Under such agreement the Financial Institute is required to collect the relevant information from all account holders in order to determine which accounts qualify as US accounts, to comply with certain due diligence standards, to deduct and withhold 30 % of pass-through payments to non-compliant Financial Institutes and to obtain a waiver of applicable bank secrecy from clients.

The other option is that the country where the Financial Institute has its seat enters into a FATCA Partner Framework Agreement. Under such agreement the FATCA partner country collects the information from the Financial Institutes and forwards it automatically to the IRS. Financial Institutes in such jurisdiction will not be subject to withholding under FATCA, will not be required to withhold pass-through payments and will not have to enter into separate agreements with the IRS.

The leading EU countries have announced their interest in becoming FATCA Partners under the condition that the exchange of information is reciprocal. The negotiations between the US and the EU are still on-going but according to EU Tax Commissioner Algirdas Semeta, a draft agreement should be drawn up by the end of June 2012 which should then be proposed to all members of the EU.

Isolated Switzerland?
In a discussion paper of February 22nd, 2012, the Swiss Government states that the automatic exchange of information is not an efficient way of collecting taxes and that it constitutes a breach of privacy for the client. Switzerland therefore aims to negotiate agreements on tax at source which results in direct income for the partner state instead of simply piling up information.

Although such argument might seem logical, Switzerland might ¿ once again ¿ face isolation due to the fact that it is surrounded by countries that have implemented the automatic exchange of information.

Furthermore, Swiss Financial Institutes might face a competitive disadvantage because they will have to negotiate with the IRS individually or suffer withholdings due to non-compliance with FATCA.



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